What the Treasury could and should have done was put the basis for devolution finance under the Conservatives on a clear and transparent footing, in particular by:

1. publishing its proposals for how reductions in block grant allocations are to be made as tax powers are devolved and the wider ‘fiscal framework’ for devolved taxation – an issue now for all three devolved governments, with high political stakes in Scotland and the need to comply with EU state aid rules in Northern Ireland emphasising its importance. This appears to be the subject of behind-the-scenes negotiations between governments but is of such fundamental importance that it needs to be in the public domain.
2. establishing an independent body to keep devolution finance under review, considering changes to the Statement of Funding Policy, the application of the Barnett formula to changes in public spending, and the working of the system more generally – a form of UK Finance Commission.
3. establishing an effective way of resolving disagreements and disputes, rather than trying to provide for informal resolution by inter-ministerial discussion followed by use of the (clearly ineffective) ‘disputes resolution’ format of the Joint Ministerial Committee. Some sort of impartial mediation is my preference, rather than an attempt at binding arbitration – but the important point is that it should be impartial and independent of all governments involved, and be able to impose some sort of meaningful sanction on the UK Government, even if that is only publication of an adverse finding.
4. Publication of better, more coherent data about how the UK’s territorial finances work – what taxes are raised where, how much is spent and where, and how that changes from year to year. This information is mostly available, but the data about tax collection are variable and scattered across various publication and documents.

For a government that has embraced devolution and is extending its scope, this is a major missed opportunity. And it preserves the contradiction about the financial implications of English spending decisions that is the worm eating at the heart of the UK Government’s now-adopted proposals for English Votes for English Laws.

The new Statement of Funding Policy contains a number of intriguing if minor changes in comparability percentages (that is, the calculation of how much a UK Department’s spending is for the benefit of England versus for the benefit of the UK as a whole). Of the big spending departments, Work & Pensions remains almost wholly a UK-wide department with spending now being 1.4 per cent ‘comparable’ for Wales and Scotland (compared to 0 per cent in 2010). Health spending is now 99.4 per cent devolved (for all three governments) compared to 99.1 per cent in 2010, and Education remains 100 per cent comparable. Both Education (schools) and health spending have been sheltered from austerity in England, of course, which also has the effect of protecting devolved budgets compared to overall spending in England.

The interesting shifts have come in departments that are ‘mixed’ and which have not been protected from austerity since 2010. At first glance, these mostly reflect protection of ‘UK-wide’ functions at the expense of ‘English’ domestic spending. Energy and climate spending was about 20.6 per cent comparable for all three governments in 2010; it’s now 1.8 per cent for Scotland and Wales, 15.3 per cent for Northern Ireland. Business, Innovation and Skills (which includes universities and the science budget) was 78-79 per cent comparable in 2010; it’s now around 66.5 per cent. Culture, Media and Sport was 96 per cent comparable for Scotland and Northern Ireland and 90.2 per cent for Wales in 2010; now it is 76.9 per cent for Scotland and Wales, 77.6 per cent for Northern Ireland. An exception (probably due to protection of police spending) is the Home Office, where spending is now 91.7 per cent ‘comparable’ for both Scotland and Northern Ireland, compared to 76 per cent in the 2010 Statement. (It was and remains 0 per cent for Wales.)

Transport spending has become somewhat less ‘comparable’ for Scotland and Northern Ireland, but more comparable for Wales; it has moved from being 73.1 per cent comparable in 2010 to 80.9 per cent. The main items that are not ‘comparable’ for Wales (but are for Scotland and Northern Ireland) are HS2 and Rail Projects generally. ‘Capital rail projects’ were treated as wholly comparable for all three governments in the 2010 version – so this has been reclassified to the Welsh Government’s disadvantage, although Wales now gets a larger overall share of changes to Transport spending (and those ‘Rail Projects’ will include electrification of the Great Western mainline to Swansea).

Overall and in structural terms, the Spending Review delivers a profoundly (small-c) conservative approach that maintains the Treasury’s dominance of tax and financial allocation decisions, even as it seeks to devolve aspects of both spending and tax-raising. Except for that maintenance of Treasury power, there is no attempt to take a UK-wide view of how the UK’s fiscal arrangements work. At the centre of these is a new version of the Statement of Funding Policy that in its essentials is very similar to its predecessors dating back to 1999. Ultimately (and probably sooner rather than later) the contradiction between purporting to devolve power and Treasury retention of it will prove unsustainable.

2 responses to “Spending Review 2015: a test the Treasury flunked”

Professor Trench,
Your article is clear and compelling even to an economic illiterate like me.
We appear to be drifting through a series of ill-thought-out changes towards greater devolution without any coherent plan…worse still, no idea of the destination. Nothing less than a constitutional conference with the maximum possible citizen involvement is needed before the whole shambles collapses in mutual recrimination and distrust. We need a written constitution for the United States of Britain (and Northern Ireland).
Alan Rogers
Lampeter
Wales
P.S. Oh! for a Thomas Jefferson.

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